Free eBook: Charles Gave’s Strategy for Optimizing the Permanent Portfolio

[Mayday_I]

Hi everyone,

Over the holidays, I came across a short book by Charles Gave, a french economist, that is available online for free: The General Theory of Portfolio Construction (https://web.gavekal.com/books/the-gener ... struction/). I thought it might be of interest to some of you here.

The book focuses on portfolio construction and presents what Gave considers an improved version of the classic Permanent Portfolio. His approach differs from Harry Browne's original concept in two key ways:

-) He adds 20% energy equities (XLE) as a hedge against oil price shocks.

-) Gave only holds Gold or LTTs at a time, never both. The rational behind that is, that LTTs and Gold are meant to protect the portfolio during diametrically opposed economic phases. The choice is determined by a dual momentum strategy.

In my opinion, a 20% allocation to XLE seems excessive. However, the dual momentum idea for Gold and LTTs is very intriguing. This strategy would have protected investors from both the long gold bear market of the 90s and the massive drawdown in LTTs in 2022/23. That said, I'm not a big fan of holding the remaining three asset classes at a fixed 33% each.

Regardless, Gave’s insights are compelling and the book is definitely worth a read.

Enjoy,
Mayday

[Jack Jones]

This looks interesting. I will take a closer look. Thanks for sharing.

[yankees60]

This looks interesting. I will take a closer look. Thanks for sharing.

Same here. Downloaded my copy. Thanks!

[dualstow]

Interesting!

[dopplerdave]

Over the years there has been a lot of discussion in this forum regarding how to improve on the Permanent Portfolio. This book offers two ways for doing so. The swap between gold and long term treasuries makes sense to me, but I am not convinced that the addition of energy stocks does. For one thing, it appears that nuclear power is about to make a major comeback, and with AI there will be a new dependency between energy and tech stocks in the S&P 500.

There is a lot of stuff in the book I do not understand, but it is worthy of consideration, especially the gold/LTT momentum swap. The Gavekal 3-Asset portfolio looks almost like a no brainer to pick up over a full percentage in average yield with negligible effect on volatility or drawdown. The following data is taken from the book so it does not include 2024 and 2025.

[boglerdude]

No ones going to have money to buy when AI takes the jobs. And "AI" is outsourcing, there are billions of people who want white collar jobs in the West. The data centers are only to record everything you do online

[frugal]

Thank you

Let me read

Happy 2026

[yankees60]

No ones going to have money to buy when AI takes the jobs. And "AI" is outsourcing, there are billions of people who want white collar jobs in the West. The data centers are only to record everything you do online

There are lots of jobs that cannot be taken by either AI or by China.

Most of them are jobs that need to be done by your hands.

I believe that at one time a huge percentage of our country were farmers? Now it's a relative few?

We had the whole personal computer / internet revolution, both of which led to greatly improved efficiencies. Yet here we are with low unemployment rates.

[dopplerdave]

This is veering way off topic. Forget AI.

I only mentioned it because it might be relevant to the Energy Adjustment mod to the PP. The author advocates adding energy producer stocks (XLE) to the portfolio in this modification. He argues that a deficiency in the PP is that it does not take into account a massive increase in the price of energy. He uses energy production as a proxy to the economy either growing or contracting. He points out that the S&P500 used to contain 30% energy stocks but is now only 4% and is dominated by tech stocks. So if oil prices increase rapidly, the economy would contract, stocks would decline and rebalancing into say VTI would only add money to tech stocks, not energy stocks. At least that is the way I interpret his Chapter 10 concern. My point was that XLE is primarily fossil fuel companies, not nuclear, and that tech stocks equate to AI which is a big energy consumer. So maybe his argument for adding XLE is still valid, but I don't see it.

His other PP mod is the gold/LTT momentum triggered swap. He gets a significant improvement in portfolio return with no increase in volatility by eliminating either gold or long term treasuries depending on whether the ratio of treasuries to gold is above or below its 7 year average. I don’t know how he calculates the statistics shown in his Chart 24 which I am pasting below. But I am hoping someone on this forum can explain it so it can be brought up to date and possibly used going forward.

UST to Gold ratio.png (32.23 KiB) Viewed 26 times